Gold in a ‘Silent’ Bull Market
Little fanfare, despite record prices
The gold price rising to above US$3100 an ounce was the talk of this week’s Mining Forum Europe in Zurich.
Despite the record high, there was no sign of exuberance.
“I think it's most quiet, silent rally in gold I've ever seen,” Alf Peccatiello, chief investment officer of macro hedge fund Palinuro Capital, told the event.
“It’s a massive rally but I don't see anyone particularly happy jumping off their chair.
“It's because this rally is being driven by sticky institutional flows.”
Alamos Gold (TSX:NYSE: AGI) CEO John McCluskey remarked that he’d previously presented at the conference when gold prices were around US$1300-1400/oz and the room was packed.
“Here we are over US$3000 an ounce, and there’s plenty of seating and I’m not sure what to make of it,” he said.
“I think to some extent, it's a reflection of what is driving the gold price, and it's clearly not buying from the West. It's not banks and investors in Switzerland, in the US and so forth.
“It's a clear reflection that gold prices have been driven by very strong accumulations from central banks that are not aligned with US dollars.
“That may be an interesting and perhaps a bullish message for everybody here, because if we haven't really even started in the West to pay attention to gold and to buy in any significant quantities, I don't think it means they never will, I think it means they just haven't done so yet.
“I'd say that bodes very well for what may be coming up, because eventually the bloom is going to come off the rose, as far as US equities are concerned, and when that happens, that will probably lead to a rotation to into gold and gold equities.”
Beware of the unicorn
Peccatiello said the game had changed since US President Donald Trump returned to office and current economic conditions were eliminating the reasons to own US assets.
He warned to beware of the “macro unicorn”, which is when both the S&P 500 and US dollar goes down.
It has only happened three other times in 1998, 2002 and in the first half of 2008, prior to the start of the Global Financial Crisis.
“And if you think about all these events, what would they have in common? It's a US idiosyncratic problem. It's a US generated crisis,” Peccatiello said.
“You're starting to see foreign investors discuss whether it makes sense to have so many US assets in this situation, so when US stocks go down and also the dollar goes down, it doesn't act as a hedge.”
Peccatiello said his clients typically invested in US assets and did not hedge their currency risk.
“Why would you? You make money two times – equities go up, and your currency doesn't perform against the dollar – actually, the dollar goes up,” he said.
“Now the same clients are seeing this macro unicorn event perhaps unfolding, and they're asking themselves, ‘well, I could get the double whammy against me’.”
The bear is over
McCluskey said he believed we were in the early stages of “probably one of the greatest bull markets in history”.
“It's so easy to get to get put to sleep by this bearish sort of atmosphere that envelops the market, because gold bears tend to last a very long time, but the bear is over, and the world is changing,” he said.
“And if you didn't notice, just open up any newspaper. Left wing, right wing, I don't care what it is – they're all sounding the alarms. There is a much more heightened political risk in the world.
“I would prefer it not to be that way. Honestly, I've got kids and I've got a grandchild now and I want the world to be a safe, wonderful place for my family to live in, but it just isn't.
“We're going to go through a phase now that I don't think any of us are going to like, and that's what gold is for.
“One of the reasons why I think gold is going to continue to do well is that there is a recognition that it is the ultimate safe haven asset. It is the ultimate money. And that has always been true and it will never not be true.”